To divest or engage, that is the ESG question
Industry experts see engagement with companies as being more impactful than divestment
To paraphrase the famous bard Shakespeare in a sustainable way - to be green, or not to be green, that is the question. The answer is yes, of course, because if you are not going green you are more than likely on your way to becoming obsolete.
Throughout 2019, the move to invest in companies that meet ESG and sustainability standards has ramped up for both institutional and private investors. As in the rest of the world, investors and consumers across Asia are choosing to spend their money on products and services they perceive as working sustainably.
The year ahead is likely to see this impetus consolidate to become a mainstream investment requirement. Whole industry sectors are now having to recalibrate their traditional way of doing business to fulfill ESG and sustainability demands or face a torrid future, or in extreme cases, no future at all.
Fossil fuels and their related businesses, such as plastics for example, face a bleak outlook unless they adapt. Meanwhile, the asset managers who have freely invested for decades in these sectors now have to take a long hard look through a lens overlaid with ESG, green, sustainable and impact investment filters.
The failure to implement the ESG/sustainability screened investments that meet clients’ growing ethical priorities could well see a generational backlash from informed investors.
And failure by industries to adapt to the growing mood of environmental sustainability concerns could also see investors sell out of these companies if they are not satisfied with their long-term ESG/sustainability commitments.
So what do fund managers who have previously ploughed billions into these at-risk sectors do from here on out? Do they turn their backs on industries or do they engage, encourage and try to turn them around, or let them die?
Speaking on a panel at the recent Association of Luxembourg Fund Industry’s Asia Roadshow in Singapore, Natalie Westerbarkey, director and head of EU Public Policy at global fund manager Fidelity in Luxembourg, tried to address this dichotomy.
“This is a hot debate right now. Should one simply divest if the company isn't green or ESG enough or is it about engagement? And what about where industries are, we find it hard to achieve agreement level, for example, in the aviation industry,” says Westerbarkey.
“We haven't got the technology yet for biofuels or electric planes. So from a Fidelity point of view, it's definitely engagement over divestment. As a first mantra, we try to engage with the company to give them a chance to convince us of a transition plan, how they are making efforts to become greener and to position those industry sectors that are very fossil fuel dependent towards more renewable energies as well,” she adds.
Also on the panel was Steven Billiet, managing director and CEO for J.P. Morgan Asset Management in Singapore.
According to Billiet, when purely focusing on the data available from the main providers in the ESG and sustainability space and credit ratings from external agencies, he doesn’t feel that they are adequate. This has led him and his firm to build and embed their own internal processes.
Fidelity’s Westerbarkey is optimistic that the rapid implementation of tech solutions will be key in aiding companies to evolve and meet the new ESG and sustainable echelons, but she hedged her bets by saying it won't happen overnight.
“Although we see that there is a lot of innovation happening right now, we should give companies a chance to transition first because if we simply divest and sell the stock, then we can't have an impact because other investors would still invest in that company. Divestment also means removing yourself from the table so it should always be a means of a last resort,” she says.
For J.P. Morgan’s Billiet, the simple carrot or stick approach is also too simplistic an argument to make for such a heterogeneous issue.
“Whether you try to influence or you just don't invest, if you really look at it from your basic integration of ESG criteria and factors in your investment decision-making process, then you would go for the influencing approach,” he says.
“Because, at that time you are not necessarily excluding anything. You are looking for a very specific company in every industry, in every sector. How are they positioned in terms of ESG risks, how are they mitigating and forward-looking, and do you think this will have a significant impact on that company more versus some of their peers?” Billiet adds.
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